The Difference between Loss and Risk

Whether driving your car or managing your program, does the absence of catastrophic loss mean there is no risk?  NO!  It means one of two things:  your risk management system has integrity and you are managing your risks superbly; or you got away with a few that you shouldn’t have.  The difference between loss and risk is often miniscule.  We have to be honest when we ask ourselves which one it is. 

Lack of loss can easily lead to complacency.  When pressure is added, compromise can follow quickly.  The Challenger accident (see Recommended Reading) is a perfect example: NASA had one of the best safety systems in the world but, under pressure, it compromised and let its guard down. Complacency is the front door to catastrophe and pressure is the back door.  Risk Scenarios are a great way to stay identify the issues without taking real chances with lives, money or reputations.

The 5 Essential Steps to Managing Risk:

1. State your Definitions.
2. Identify the Issues to which you are exposed.
3. Brainstorm cost/effective Solutions.
4. Make Decisions on which solutions best satisfy your objectives.
5. Implement and monitor Controls

1st Principle of Risk: State Your Definitions

 “If you wish to converse with me, define your terms,” said Voltaire.  Our assumptions define us.  They limit us.    They can also kill people.  Ambiguity is another major source of risk.  Tasks, properly defined, are already half done.  The picture in your head must be the same as those in the heads of others!

 Critical definitions include: objectives, assumptions, principles, processes and acceptable standards.

 Defining things twice is often useful – stating what you want and what you don’t want.  Paraphrasing, written confirmation, drawings, models, trial runs, etc. all reduce the chance that things will go awry. 

“The least initial deviation from the truth is multiplied later a thousand fold.”  Aristotle said 2,400 years ago.   Today, it still takes time and requires extra thought, but it soon pays dividends. 

Bottom Line: Take the time to define your terms!

Recommended  Reading for Risk Managers

The Challenger Launch Decision: Risky Technology, Culture and Deviance at NASA by Diane Vaughan.

This sociology professor examines the pressures that caused NASA to compromise its high standards, to normalize deviance and ignore clear warnings that produced an unforgettable national tragedy.  At  500 pages, it’s not light reading, but you’ll find it lists many of the dysfunctional behavioural patterns that you should avoid in your organization. Highly recommended.  Available at better book stores.  

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